In one of his wise, homespun lessons for investors, legendary investor Warren Buffett once likened shares to hamburgers. He asked this simple question:
“If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef?
The billionaire ‘Oracle of Omaha’ then added: “If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period?”
Buyers should welcome bargain prices
The answer to both questions is that ongoing buyers of hamburgers and stocks should seek the same thing: lower prices today (and higher prices when they become sellers, of course!).
Thanks to this coronavirus crisis, share prices across the board are a lot lower than when the FTSE 100 index peaked in 2020 at 7,674.6 on 17 January. As I write on Friday afternoon, the Footsie is hovering around 5,485, down over 28% in just 10 weeks. Bad news for today’s sellers, but good news for today’s buyers, according to Buffettology.
Buy what you know
Buffett also urges investors to “buy what you know”, stick within “your circle of competence” and “never invest in a business you cannot understand.”
Hence, when I root around in the stock market’s bargain bin, I often seek out members of the blue-chip FTSE 100, as these companies are well known and analysed extensively by analysts and private investors alike.
In troubled times, buy boring businesses
In stressful times, it pays to buy shares in ‘boring’ companies – firms that are easily understood and whose business you could explain in a few words to a smart seven-year-old. Hence, my unexciting pick for today’s cautious and nervous investors is GlaxoSmithKline (LSE: GSK). Here are five reasons why I’d buy and hold this stock for the long term:
1. GSK’s core business is basic
GSK is not a sexy business. Quite simply and in its own words, GSK makes “pharmaceutical medicines, vaccines and consumer healthcare products”. Thus, during a global health crisis, its revenues and profits should survive and even thrive. Even better, the company’s origins go back all the way to 1873, so it’s endured almost 150 years of global booms and busts.
2. GSK is big – very big
With small businesses worldwide teetering on the brink, it pays to park money in the shares of big businesses. At the current share price of 1,430p, GSK’s market value is almost £72 billion, placing it in the top five by size of FTSE 100 members. Outside of the USA, that’s considered pretty big.
3. GSK’s share price is down 23% recently
GSK’s shares have fallen by almost a quarter (23%) since their 2020 peak of 1,857p. In Buffett’s terms, our burgers are now over £4 cheaper than they were on 24 January, which is a decent discount. On the other hand, they are over £1 more expensive than when they changed hands at 1,328p on 16 March.
4. GSK pays a chunky dividend
Because of its high cash dividend, GSK has long been regarded as an ‘income share’, steadily paying out quarterly cash to shareholders for decades. Although GSK’s yearly dividend has been stuck at 80p since 2016, this still equates to a dividend yield of 5.6%. However, this payout is covered only 1.2 times by earnings, so a dividend cut might happen at some point. Then again, even a 20% cut would still leave the shares yielding almost 4.5% a year.
5. I’ve owned GSK shares for decades
Finally, I first bought shares in one GSK predecessor in the 1980s, when I was an investment beginner and Glaxo was worth maybe £5 billion at most. Since then, I’ve owned GSK shares almost continuously for the past three decades and have come to know many long-serving employees. In Buffett-speak, I feel that GSK is squarely inside my circle of competence.
To sum up, for investors who prefer deep sleep to restless nights, GSK is a share to buy and tuck away. It’s way too big to ‘shoot the lights out’, but it may also be ‘too big to fail’. Meanwhile, that 5.6% dividend yield is an obvious attraction, even if GSK’s share price doesn’t go up for a long while!
